Gold May Decline Temporarily As Investors Seek Dollar Liquidity -- OCBC Research

KUALA LUMPUR, March 13 (Bernama) -- Gold prices may decline temporarily as investors sell liquid assets to raise US dollar funding, similar to trends seen during the global financial crisis and the early phase of the COVID-19 shock, according to an analyst.

In a research note, OCBC Group Research FX strategist Christopher Wong explained that although gold is widely regarded as a safe-haven asset, history has shown that it does not always rise immediately in periods of acute market stress.

“During severe financial or geopolitical shocks, investors may sell gold to raise liquidity, particularly when margin calls and portfolio deleveraging require immediate access to cash,” Wong said.

This pattern occurred in several major crisis episodes, including the 2008 global financial crisis, when gold was initially sold off as demand for cash and margin calls forced liquidation of profitable trades across asset classes.

“In the early phase of the COVID-19 pandemic (2020), gold prices declined as investors sought liquidity and deleveraged portfolios,” he said.

Wong said elevated geopolitical risks, policy uncertainty, and concerns about global growth have historically supported demand for gold as a defensive asset.

At the same time, continued central bank diversification into gold and a broader base of investor participation are expected to provide structural support for the metal.

But there is a flip side. The narrative can be challenging for gold in the near term. Sharp rise in energy prices risks re-igniting inflationary pressure. If inflation proves more persistent, monetary easing could be delayed or reversed.

“In such a scenario, nominal yields and real interest rates would likely stay elevated, tightening global financial conditions and in turn, setting an unfavourable environment for gold bulls,” he said.

Wong said the current environment has created tension for gold.

“While demand for safe-haven assets remains intact, rising real yields and stronger demand for dollar liquidity could limit gold’s upside in the near term. This also explains why gold has largely traded range-bound following the decline in prices at the onset of the US-Israel-Iran war,” he said.

-- BERNAMA